Analysis of Nonfarm Equity Forms of Investment Applicable to Agriculture

Abstract

U.S. agriculture has an on-again, off-again relationship with nonfarm equity capital. On the one hand, investor capital enables entry and expansion, while on the other hand it is characterized as threatening owner-operator control and encouraging large-scale farms to dominate production and marketing. The mid-1980s find U.S. farmers in a mixed scramble both to scale down and to expand. However, debt capital is unusually tight as traditional lenders are balking at loan applications that would have been readily approved in the 1970s. The purpose of this article is to examine legal business forms and ownership mechanisms that would enable nonfarm investors to contribute toward the current capital needs of U.S. agriculture. One typically thinks of investment as a capital contribution to an already existing farm business, yet the large number of farm foreclosures and bankruptcy liquidations in the mid1980s suggests that equity capital may be equally important as substitute equity, allowing farmers with untenable financial positions to exit or moving large creditor inventories of repossessed collateral. But additional equity can be brought into agriculture without old equity selling out entirely. Farming mentality traditionally responds to a capital shortage as answerable only by additional borrowing or selling of assets. Equity capital can be made directly available to the farm operation by investors who want to participate in gains in exchange for risk sharing as well as by farm asset owners who make their income-producing assets available to farmers through leasing. In both cases, the farm operator would participate in, if not control, decision making. The investment forms selected for discussion include financial leases and leasebacks, limited partnerships, and corporations. Other investment business forms or mechanisms include general partnerships, co-ownership, agency contracts, condominia, trusts, and production contracts. Before describing these alternative investment forms, it may be useful to examine the reasons for using various legal entities.